United States: Can An Epidemic Make Contractual Obligations Impracticable? The Potential Viability Of Ebola-Related Defenses To Contract Enforcement

What happens when a party to a contract asserts an inability to
perform based on circumstances beyond its control? An Ebola
outbreak, or even a single case, could make it difficult for
healthcare providers to meet contractual obligations. The Texas hospital that treated Thomas Eric
Duncan suffered a massive drop in business following news of Mr.
Duncan's treatment, with approximately two-thirds of its beds
empty and patients cancelling professional appointments in
droves. That kind of sudden drop off in revenue could cause
strain on existing contracts, particularly if the contracts contain
outputs or requirements provisions. Another possible conflict could
arise if a supplier to a healthcare provider is unable to meet its
contractual obligations if an outbreak causes a spike in demand for
a particular product. Whether you are seeking to enforce
another party's contractual obligations or looking for relief
from your own, the defense of impracticability may arise.

Under well-settled principles of contract law, "contract
liability is strict liability . . . [t]he obligor is therefore
liable in damages for breach of contract even if he is without
fault and even if circumstances have made the contract more
burdensome or less desirable than he had
anticipated."1 As is often the case with the law,
however, the rule is not absolute. The doctrine of
impracticability provides for the discharge of contractual
liability where an impeding event has occurred and the
non-occurrence of that event "was a basic assumption on which
the contract was made."2 The Restatement
(Second) of Contracts lays out the contours of this concept:

Performance may be impracticable
because extreme and unreasonable difficulty, expense, injury, or
loss to one of the parties will be involved. A severe shortage of
raw materials or of supplies due to war, embargo, local crop
failure, unforeseen shutdown of major sources of supply, or the
like, which either causes a marked increase in cost or prevents
performance altogether may bring the case within the rule stated in
this Section. Performance may also be impracticable because it will
involve a risk of injury to person or to property, of one of the
parties or of others, that is disproportionate to the ends to be
attained by performance. However, "impracticability"
means more than "impracticality." A mere change in the
degree of difficulty or expense due to such causes as increased
wages, prices of raw materials, or costs of construction, unless
well beyond the normal range, does not amount to impracticability
since it is this sort of risk that a fixed-price contract is
intended to cover. Furthermore, a party is expected to use
reasonable efforts to surmount obstacles to performance . . . and a
performance is impracticable only if it is so in spite of such
efforts.3

The United States Supreme Court also weighed in on the topic,
stating:

For a successful impossibility
defense the Government would have to show that the nonoccurrence of
regulatory amendment was a basic assumption of these contracts . .
. . The premise of this requirement is that the parties will have
bargained with respect to any risks that are both within their
contemplation and central to the substance of the contract . . .
"[i]f [the risk] was foreseeable there should have
been provision for it in the contract, and the absence of
such a provision gives rise to the inference that the risk was
assumed."4

Tennessee courts have taken a
similar position,5 and Texas courts also follow the
Restatement.6 Not all jurisdictions follow that
reasoning, however. For example, Alabama does not recognize
the Restatement defense of impossibility or impracticability, for
under Alabama law:

Where one by his contract undertakes
an obligation which is absolute, he is required to perform within
the terms of the contract or answer in damages, despite an act of
God, unexpected difficulty, or hardship, because these
contingencies could have been provided against by his
contract.7

As a result, jurisdictions like Tennessee and Texas, and under
federal law, a party to a contract may find relief from their
obligations under certain circumstances. Relief will only be
granted, however, where the party's duties are made
impracticable. Additionally, the party seeking relief faces the
substantial hurdle of proving that the effect of the Ebola virus
was unforeseeable, or at least unforeseen; and, therefore, the lack
of a provision allocating the risk of the virus or other disease
should not be used to show that they assumed the risk.

In those jurisdictions that follow Alabama's approach,
impossibility or impracticability is not a defense to contractual
duty because the law requires parties to allocate or assume the
risks involved; whether those risks are foreseeable or
unforeseeable. Because the spread and effect of the Ebola virus is
a risk that could have been provided for, whatever the virus does
to the parties' abilities to perform the contract it will not
discharge the parties' duties to perform the contract.

So can a healthcare epidemic like an Ebola outbreak support a
defense of impracticability? The answer is "it
depends." In a jurisdiction like Alabama that does not
recognize the defense a party will never be able to avoid
contractual obligations based on impracticability. In
jurisdictions like Tennessee that follow the Restatement model the
answer may depend on whether courts in that jurisdiction have found
other, similar risks to be foreseeable. In any case,
healthcare providers concerned about a significant reduction in
revenue based on a public health scare or concerned about other
parties failing to meet their contractual obligations due to the
same should know that the defense of impracticability might be
raised. 8

Footnotes

1. Restatement (Second) of Contracts Ch. 11 Intro.
Note (1981).

2. Id. (quotation omitted); accord
U.C.C. § 2-615(a) ("Delay in delivery or non-delivery in
whole or in part by a seller . . . is not a breach of his duty
under a contract for sale if performance as agreed has been made
impracticable by the occurrence of a contingency the non-occurrence
of which was a basic assumption on which the contract was made . .
. .").

3. Restatement § 261 Comment d.

4. United States v. Winstar Corp., 518 U.S.
839, 905 (1996) (emphasis added). In Winstar the
Supreme Court equated "impossibility" with
"impracticability." See id. at 904.

5. Groner v. On-Site Grading, Inc., No.
E1999-00219-COA-R3CV, 2000 WL 502843, at *4 (Tenn. Ct. App. 2000)
(quoting Wilson v. Page, 325 S.W.2d 294, 298 (Tenn. Ct.
App. 1958)) ("Moreover, failure to perform a contract is
excused if performance becomes impossible due to a cause not
attributable to the non-performing party and the impossibility is
'not among the probable contingencies which a man of ordinary
prudence should have foreseen and provided
for.'").

8. Contracting parties may try to use the doctrines of
"frustration of purpose" or force majeure to
escape contractual duties. Restatement section 265 provides for
discharge of contractual liability where "a change in
circumstances makes one party's performance virtually worthless
to the other, frustrating his purpose in making the contract."
The requirements for a frustration defense are similar to those of
an impracticability defense; the situations, however, are distinct
because frustration does not require an "impediment to
performance by either party." Id. at Comment
a.

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